Japan’s private sector showed more signs of recovery in June. The flash composite PMI rose to 51.4 from 50.2 in May, thanks to stronger services and a small increase in manufacturing output. However, demand conditions still appeared weak. New business growth remained modest, impacted by lower overseas demand due to U.S. tariffs and global trade uncertainties affecting exports. Companies are cautious about the future, with sentiment close to post-pandemic lows. On the bright side, input cost inflation fell to its lowest in 15 months, and employment grew at its fastest rate in nearly a year. The June figures reveal some resilience. Although the change in the composite PMI from 50.2 to 51.4 may seem small, it’s significant given the last 18 months. The improvement stems from stronger services and a rebound in manufacturing output—two sectors that had been opposing each other recently. Still, while output levels increased, overall demand hasn’t surged. New business growth has been slow, indicating that customers—both domestic and international—remain uncertain. Exports are particularly struggling. International challenges like higher import taxes and unclear global trading rules are suppressing foreign orders. This hesitation has a ripple effect on broader industrial planning. Expectations for the future haven’t returned to pre-2020 levels either. Business optimism is low, and there’s a sense of hesitation. Companies, whether small or large, are thinking carefully before making new investments or expansions. However, some indicators show improvement. Input cost inflation has softened, which provides relief, especially for sectors that depend on imported energy or raw materials. This allows companies to stabilize their pricing without immediately passing higher costs onto customers. Job creation also increased, marking its fastest growth in almost a year, suggesting some confidence that orders will remain steady. What’s important is that the data shows mixed signals. There’s neither a significant advance nor a dramatic decline. The uneven improvement is what matters most. Given the increase in output but lingering demand concerns, we may be seeing a base forming under activity. However, it’s also fair to believe that there won’t be much room for growth, especially with global trade risks and sentiment stuck in narrow ranges. This provides a framework for considering potential short-term shifts. The growth in employment reduces fears of sudden drops, but it also means that earnings and consumption expectations could improve slightly. A decrease in cost pressures might lead to lower inflation over time, influencing interest rate expectations. This could help stabilize the yen, particularly if Tokyo’s policies diverge from those of other major economies. In terms of positioning, it makes sense to have moderate exposure to output-sensitive sectors, while hedging against potential downturns in demand. We should be cautious and not assume that early output growth confirms a broader trend. The inconsistencies across sectors, especially in exports, indicate that everything isn’t moving together just yet. It’s also crucial to keep in mind last year’s weaker data, which raises the bar for interpreting month-to-month changes. A modest PMI increase like the recent one might seem more significant on paper than it feels to those managing supplies. There’s potential for short-term trades if inflation expectations align with the slow trend in input costs. If the strength in employment leads to a slight increase in domestic consumption, that could tighten yield gaps even more. Strategic calendar spreads might capitalize on mismatched expectations of central bank reactions. However, it’s not yet the time to dive into high-risk investments with strong confidence. The softness in new orders and ongoing uncertainty around foreign demand still loom large, suggesting that strategies should be focused on flexibility rather than long-term commitment.

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